Obama Will Try to Clarify the Role of Tax-Exempt Groups in Politics

The Obama Administration is trying to untangle the controversy over the growing role of 501(c)(4) social welfare organizations in politics by creating a new category of banned candidate-related activity. I wish it all the luck in the world.

Treasury and the IRS will propose regulations that aim to clarify what these groups may and may not do. The agencies are asking for public reaction and say, with remarkable bureaucratic understatement, “The Treasury and IRS expect to receive a large number of comments.”

The proposal would prohibit an organization from qualifying for tax-exempt 501(c)(4) status if it engages in several activities, including:

•Advocating for a candidate.

•Engaging in communications within 60 days of a general election or 30 days of a primary that identify a candidate or political party.

•Spending that must be reported to the Federal Election Commission.

•Making contributions that must be reported under campaign finance law.

•Giving grants to other tax-exempt organizations that conduct candidate-related political activities.

•Participating in voter registration and "get-out-the-vote" drives.

•Distributing material that supports a candidate or a Section 527 political organization.

•Preparing or distributing voter guides that refer to candidates or political parties.

•Holding an event within 60 days of a general election or 30 days of a primary election where a candidate appears.

Treasury seems to be trying to coordinate its rules with federal election law. This seems sensible but its proposal leaves many questions unanswered. For instance, Treasury will have to decide what proportion of an organization’s activity must be to promote social welfare. Would some limited political activity still be permissible? Could a citizen’s association participate in a non-partisan voter registration drive?

By now, most TaxVox readers are aware of the backstory. The century-old law that created tax-exempt organizations granted 501(c)(4) status to social welfare organizations such as neighborhood associations as long as they avoided political activity. But decades ago, the IRS began to blur the lines by allowing groups to engage in politics as long as this was not their primary purpose.

What did that mean? Nobody really knew and the IRS began relying on a facts-and-circumstance test to sort it out. In effect, the agency said, “we know it when we see it.”

Everyone muddled through until the Supreme Court opened the door to political mega-giving in its 2010 Citizens United decision. In the wake of that decision, (c)(4) status became a popular mechanism for bankrolling campaigns. Citizen’s United made it possible for unions and businesses to spend unlimited amounts of money on politics, but the vehicle they used for funneling cash to campaigns, Sec. 527 organizations, required public disclosure of their gifts. By contrast, 501(c)(4)s can collect massive amounts of money anonymously.

Recently, we’ve learned that some (c)(4)s are acting as nothing more than money laundries by collecting millions of dollars in anonymous gifts, then redistributing them to 3rd party non-profits that buy millions of dollars in political advertising.

The IRS tried to get a handle on all this but instead ended up in a nasty political morass. Conservatives accused it of bias last year after several Tea Party groups claimed the agency harassed them when they applied for tax-exempt status. It turned out that the flap was more a matter of tin-ear bungling than a political hatchet job. Still, the episode showed how flawed the current system is.

Now, the Treasury and IRS are trying to clean up the mess. As I have written before, the IRS is the last agency that should be defining political speech. This should be Congress’ job, though, like everything else these days, Congress is unlikely to do it.

Give the IRS and Treasury credit for trying, but I can just imagine the firestorm that’s coming.

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